Inflation data from the US and the UK coupled with Q4 GDP from China and retail sales from the US as well as employment data from Australia will highlight the week ahead of us.
USD
An article in the Washington Post stating that tariffs will be selective, targeting only certain strategically important industries rather than all imports, caused stir in markets on Monday as USD lost around 1% against other currencies. President Trump later called the article “fake news” but USD did not manage to regain all of its loses. The new presidential term shapes up to be a very volatile one driven by the news and tweets.
ISM services PMI for the month of December printed 54.1 vs 53.3 as expected and up from 52.1 in November. Unfortunately when we dig deeper into the report we find dissatisfying picture. The main reason services PMI rose was due to a jump in prices paid component which printed 64.4, the highest reading in almost two years, after a 58.2 reading the previous month. This indicates that price pressures are increasing in the services sector and that services inflation will be a hard nut to crack and bring down. As a result Fed could postpone planned rate cuts and USD strengthened. The report also shows positive signs such as jump in business activity and an increase in new orders component.
FOMC minutes from the December meeting saw participants agree that if data comes in as expected that the right path will be gradual decrease of rates towards a more neutral stance. Risks to employment and inflation goals are seen as “roughly balanced” by the majority of participants while “almost all” participants see increased upside risks to the inflation outlook. Additionally, some members think that it would be prudent to keep rates unchanged due to persistent inflation pressures.
Employment report for December was a strong one. Headline number came in at 256k vs 160k as expected. The unemployment rate ticked down to 4.1% from 4.2% in November while participation rate remained at 62.5%. The underemployment fell to 7.5% from 7.7% the previous month. There was some slowdown in wages as they rose by 0.3% m/m and 3.9% y/y compared to 0.4% m/m and 4% y/y increases in November. Private education and healthcare services added 80k jobs, leisure and hospitality 43k, retail trade also 43k while government added 33k jobs.
The yield on a 10y Treasury started the week at 4.60%, rose to 4.79% after employment report and finished the week at around 4.77%. The yield on 2y Treasury started the week at 4.28% and reached the high of 4.38% while yield on a 30y Treasury almost reached 5%. Spread between 2y and 10y Treasuries started the week at 33bp and finished the week at 37bp as curve steepened further. The 2y10y was inverted for over two years. FedWatchTool sees the probability of a 25bp rate cut at January meeting plummet post NFP to around 3%, while probability of a no cut is around 97%. June is now the first meeting that sees above 50% probability of a rate cut.
This week we will have PPI, CPI, headline expected to rise while core is seen coming in unchanged and retail sales data.
Important news for USD:
Tuesday:
PPI
Wednesday:
CPI
Thursday:
Retail Sales
EUR
Final services PMI reading for December was revised up to 51.6 from 51.4 as preliminary reported. Positive revision came in from both Germany and France while Spain services PMI jumped to 57.3 from 54.1 the previous month. The report shows growing concerns regarding inflation pressures as costs continued to increase. Composite was also slightly revised up to 49.6 from 49.5 as preliminary reported. Eurozone economic confidence in December dropped to 93.7 which is a level not seen since November of 2020. The amount of pessimism surrounding Eurozone reached levels reached around pandemic.
Preliminary December CPI reading saw both readings come in as expected with headline at 2.4% y/y and core at 2.7% y/y. Headline reading rose from 2.2% y/y in November, for the third straight month of increases, while core reading was unchanged for the fourth straight month. Services inflation ticked up to 4% y/y and monthly reading saw an increase of 0.4%. German CPI came in at 2.6% y/y vs 2.4% y/y as expected and up from 2.2% y/y in November. French CPI came in unchanged at 1.3% y/y while markets were expecting a tick up to 1.4% y/y. Increase in overall inflation led to increase in expected terminal rate and thus helped EUR gain some strength.
GBP
December saw final services PMI revised down to 51.1 from 51.4 as preliminary reported but still up from 50.8 in November. Similar to the Eurozone reading there was a sharp increase in input costs as they printed a new 8-month high. The report showed worrisome picture on the employment front as “Nearly one-in-four survey respondents saw an overall decline in their payroll numbers. Excluding the pandemic, this represented the steepest pace of job shedding for more than 15 years.” Composite ticked down to 50.4 from 50.5 as preliminary reported.
The 30y Gilts, UK bonds, rose to 5.30%, the highest level since 1998 while 10y reached levels not seen since mid 2000s. Bond markets are pressuring Chancellor of Exchequer to slow down public spending.
This week we will have inflation data where headline is expected to remain unchanged while core is expected to show a notable decline.
Important news for GBP:
Wednesday:
CPI
AUD
Caixin services for December printed new 7-month high at 52.2, up from 51.5 in November. Activity was driven by strong domestic demand while international demand declined indicating that global growth weakness will pose challenges. Composite printed 51.4, down from 52.3 the previous month due to weakening manufacturing sector. The economy is still growing but at a slower pace. December CPI data saw increase of 0.1% y/y after a 0.2% y/y in November. Lower food prices were the main culprit for the PPI continued to decline but with a -2.3% y/y print the decline has been slowed down as compared to a -2.5% y/y drop the previous month.
This week we will have employment data from Australia as well as economic activity data from China.
Important news for AUD:
Thursday:
Employment Change
Unemployment Rate
Friday:
GDP (China)
Industrial Production (China)
Retail Sales (China)
NZD
First dairy auction of 2025 saw prices decline by 1.4% led by a drop in lactose prices. Butter prices showed the biggest increase. Kiwi has spent the week pressured down by USD strength and that pressure was exacerbated after strong employment report.
CAD
Long time Prime Minister Justin Trudeau resigned on Monday. His popularity fell to the lowest levels and his Liberal party will have hard time remaining in power. Conservative party is gaining ground in the polls and it is almost certain that Pierre Poilievre is seen as the next Prime Minister. Former BoC and BoE governor Mark Carney is seen potentially taking the roles as the new leader of Liberal Party. He is seen as a market-friendly candidate which led to CAD gaining strength.
December employment report showed economy add 90.9k jobs vs 25k as expected. The underemployment rate ticked down to 6.7% while expectations were for it to tick up to 6.9%. Participation rate was unchanged at 65.1%. Majority of jobs, 57.5k were full-time jobs, while part-time jobs rose by 33.5k. Wages growth eased to 3.7% y/y from 3.9% y/y seen the previous month. The economy has added jobs in three out of four last months with last two months showing gains of around 141k jobs.
JPY
Final December services PMI printed 50.9, down from 51.4 as preliminary reported but still up from 50.5 reading from November. The report showed increase in new orders supported by domestic demand. Both input and output prices remain high but stable indicating that inflation pressures are not going anywhere. Composite rose to 50.5 from 50.1 the previous month.
Labor cash earnings for the month of November rose 3% y/y after a 2.6% y/y increase in October. This marks the highest wage increase since 1992! However, when inflation is taken into account, we get real wage growth at -0.3% y/y for a fourth straight month of declines. Household spending for the same month rose 0.4% m/m but on the year it continued to decline and printed -0.4%.
CHF
SNB total sight deposits for the week ending January 3 came in at CHF439.6bn vs CHF445.7bn the previous week. Sight deposits have broken the range to the downside and have now fallen to the lowest levels since 2015. With SNB aggressively cutting interest rates these changes are reflecting commercial banks moving funds out of the Swissy. December inflation came in at 0.6% y/y as expected while core reading declined to 0.7% y/y from 0.9% y/y in November.
